Surging U.S. Corporate Spending May Offset Sequestration

Companies in the U.S. are beginning
to empty their deep pockets and boost capital spending as they
look past the specter of sequestration and global growth risks.

Orders for capital goods excluding aircraft and military
equipment -- an indicator of future business investment --
increased 1.5 percent in May, a third consecutive advance and
the longest streak since October 2011. Chief executive officers
are more optimistic about the economy, based on the Business
Roundtable’s quarterly outlook index, which rose to 84.3 in the
second quarter, the highest in a year.

“Investment will pick up in the second half of the year,”
driven by strength in housing and the automobile industry, said
Yelena Shulyatyeva, a U.S. economist in New York at BNP Paribas.
“For companies to start really benefiting, to be profitable in
the future, they need to invest.”

Start Now

“We’ve got to start investing in now, so we can be ready
for what traffic we’re expecting” in fiscal 2016, Alan Graf,
chief financial officer of Memphis-based FedEx Corp. (FDX), said on a
June 19 conference call. The world’s largest cargo airline plans
to spend about $4 billion on capital goods in fiscal 2014,
including for facilities and aircraft, while investments for its
ground-shipping subsidiary also will climb for the “next
several years” to meet growing demand, Graf said.

Such increases are set to bolster the U.S. expansion
between now and year-end as companies unleash cash from their
record-high balance sheets amid a brighter economic outlook. Job
gains that beat expectations in June have helped firm market
projections of a September start for the Federal Reserve to
begin reducing its unprecedented $85 billion in monthly asset
purchases, indicating confidence that growth is sustainable
without record levels of monetary stimulus.

Tax Increases

Shulyatyeva projects capital expenditures will accelerate
at a 6.9 percent annualized pace in the third quarter and 7.6
percent in the fourth after growing 4.4 percent in the three
months ended June 30. The increase was only 0.1 percent in the
first quarter, as federal budget cuts and tax increases weighed
on the private sector.

Gross domestic product rose 1.8 percent in January-March.
BNP economists estimate it will reach 2.4 percent in the final
three months of the year after 2.2 percent in the third quarter
and 1 percent in the second.

Technology Boon

Increased spending on technology equipment probably will
prove a boon for Redmond, Washington-based Microsoft, navigation
device-maker Garmin Ltd. (GRMN) of Switzerland and Cognizant Technology
Solutions Corp. (CTSH), which reap the majority of their revenue in
North America. Microsoft boosted investment by 24 percent and
Garmin by 102 percent during the past year. Cognizant, a
provider of technology-consulting services based in Teaneck, New
Jersey, increased spending by 19 percent in the same period.

The Federal Reserve Bank of San Francisco’s Tech Pulse
Index, which tracks the health of the U.S. IT industry, is
showing an improvement in investment, consumption, employment,
industrial production and shipments, rising to 98.96 in May, the
highest since August 2008.

“A lot of these companies are sitting on lots of cash and
trying to figure out what to do with it,” said Richard Gordon,
a researcher of global IT-market forecasting for Gartner UK Ltd.
in London.

Businesses have been hoarding funds in the aftermath of the
recession, with nonfinancial liquid assets reaching a record
$1.78 trillion in the first quarter.

Climbing Confidence

Gauges of corporate confidence also are climbing. The
Morgan Stanley Business Conditions Index jumped to 71 percent in
June, the strongest since January 2011 and matching the largest
one-month increase. The Conference Board’s measure of CEO
confidence increased to 62 in the second quarter, the highest
since the first quarter of 2012, from 54 in the prior three
months. A reading above 50 indicates more positive than negative
responses.

Rising employment reflects the improvement. Payrolls
increased by 195,000 in June for a second straight month, the
Labor Department reported July 5, capping 12 consecutive months
of gains above 100,000 -- the longest such streak since the 33
months ended in May 2000.

Capacity utilization, a measure of efficiency that averaged
74.5 during the recession, was at 77.6 in May, indicating
companies across all industries may be forced to spend more to
keep up with demand.

Accelerate Investment

Businesses will need to accelerate the pace to surge above
pre-recession levels, however. Nonresidential investment,
including in equipment and software as well as structures such
as office space, fell by $376 billion between the fourth
quarters of 2007 and 2009 and has since climbed $308 billion.

Capital-goods orders slowed last year, declining 4.7
percent in December from a year earlier after rising 9.2 percent
in the 12 months ended in January 2012. The outlook for 2013 is
“okay, but not great,” with orders “trending along in the
mid-single-digit range, which is not exceptional,” said Michael Carey, chief economist for North America at Credit Agricole CIB
in New York and the top forecaster of GDP growth for the two
years ended in May, according to data compiled by Bloomberg.

Carey sees the economy expanding 1.3 percent in the second
quarter, 2.4 percent in the third and 2.9 percent in the fourth.

For businesses to make bigger capital investments, they’ll
need to see more strength in consumer demand and sales, which
have been “a little uneven,” Carey said.

Below Forecast

Retail sales rose 0.4 percent in June, less than forecast,
as demand cooled at building-materials outlets and restaurants.
The gain followed a 0.5 percent increase in May that was lower
than previously reported, Commerce Department figures showed
today in Washington. The median forecast of 82 economists
surveyed by Bloomberg called for a 0.8 percent advance.

Another potential obstacle to corporate spending is the
prospect for budget gridlock as the U.S. Treasuryapproaches its
$16.7 trillion borrowing limit and Congress negotiates fiscal
2014 spending. World economic growth is also a consideration.
The International Monetary Fund trimmed its forecast for a fifth
consecutive time July 9 to 3.1 percent this year, unchanged from
the 2012 rate and less than its 3.3 percent April forecast.

Consumer Sentiment

Even so, gains in the U.S. housing and auto markets that
persisted through a weak first quarter have come amid rising
consumer confidence, encouraging businesses to spend. Consumer
sentiment held near a six-year high in June, according to the
Thomson Reuters/University of Michigan gauge, and the Bloomberg
Consumer Comfort Index climbed in the week ended July 7 to the
highest since January 2008.

Total new-home sales in May jumped to 476,000, the fastest
annualized pace since 2008, and permits to build one-family
homes also climbed to a five-year high.

Even as mortgage rates rise from record lows, the economy
is less interest-rate-sensitive as households have repaired
their balance sheets and home affordability has surged, said Ted Wieseman, an economist at Morgan Stanley in New York. The
average for a 30-year fixed-rate mortgage was 4.51 percent in
the week ended July 11, the highest in almost two years,
compared with 3.31 percent in November, the lowest in records
dating to 1972, according to data from Freddie Mac.

Cancelled Closings

Automakers that typically would be closing shop this month
for annual retooling are either shortening or canceling the
shutdowns because of increased demand. Cars and light trucks
sold at a 15.9 million seasonally adjusted annualized rate in
June, the strongest since November 2007.

Most of Ford Motor Co. (F)’s North American assembly plants are
idling for one week this summer instead of two, increasing
production by about 40,000 cars and trucks, the company said May
22. Three of Auburn, Michigan-based Chrysler Group LLC’s
assembly plants and all except one of its engine, transmission
and stamping factories are skipping a summer shutdown this year,
the automaker said.

The abbreviated and canceled shutdowns show automakers are
“really ready to invest in capacity, invest in production,”
Shulyatyeva said. Capital expenditures at Ford, based in
Dearborn, Michigan, already have surged by 36 percent in the
past year, based on data compiled by Bloomberg.

Family Dollar executives plan to spend between $750 million
and $800 million on capital goods this fiscal year, including on
new stores.

“While the current sales environment remains challenging,
I believe that our future is bright and that we are making the
right tactical and strategic decisions to move the business
forward,” Michael Bloom, president and chief operating officer,
said on a July 10 conference call.